Lagarde,SummersandLudditeprotests

The Dollar index has retreated below 92 levels after touching the highest levels since mid-April. The US 10-year yield showed a puzzling sharp slump yesterday where at one time it traded close to 1.36, however it is back to 1.49 levels now. The movement in US yields have been a bit erratic since the more than anticipated tone change in the policy last week where the long-term yields first rose and then came down. However, the short-term went up making the term structure relatively flatter. This maybe is on the back of the realization that even if interest rates start going up it will not be a one-way street.

Equity markets though continue to fare well. Dow Jones had its best day in a month where it went up by 1.76%. Asian markets are also in green during the opening today with the Nikkei showing a 3% rise in the early trade. In the US we will have the testimony by Fed Chief Jerome Powell for the congress. In the prepared remarks he is expected to touch the issues of growth, the pandemic and inflation. In his last week post FOMC address he had said that the price pressures have increased notably but still refer to the factors which are transitory in nature and expected to ease out in time.

Staying on testimonies, ECB Chief Christine Lagarde also presented her statement to the Economic and Monetary Affairs committee of the European Parliament. She stated that GDP growth is expected to show a robust increase of 4.6% in 2021. The scare from virus mutations will be balanced by the brighter global demand and faster consumer spending. On the inflation front, pricing pressures are expected to increase owing to temporary supply constraints and the recovery in domestic demand. There can also be a situation where the higher inflation expectations in the US spills over to the Euro area, but this phenomenon is expected to remain moderate. Staff projections show the headline inflation to remain 1.9% in 2021 slowing down to 1.4% in 2023.

Readers can note that the common thread across remains that inflation is expected to remain docile and any scare reading is because of the temporary factors. The close to universal belief has been in the making for a decade where accommodative policies post GFC didn’t stoke any wide-spread price rise. Inflation hawks like former US Treasury Secretary Larry Summers are now considered belonging to the luddite tribe which doesn’t understand how the new modern economy functions. Summers argument are predicated on the point of an overheating economy (producing more than the potential output) which leads to labour shortages and then a runaway inflation. The hyper price rise situation leads to dislocations, capital movement and uncertain economic choices, all leading to a doomsday scenario. His famous allegory is of a speeding car moving at 100 mph on an empty road, meeting an accident.

Now the term Luddite refers to a movement in early 19^th century England where protests were rife against newly constructed textile mills and wanted to reverse the course of technological revolution. Now unlike technology, economics is not a hard science, here multiple realities can claim to represent the truth at the same time. A demand rise can be met for some time by global supply but what if the global supply chains break down. Lately the shipping costs are increasing across dry bulk as well as containers. As per some reports shipping costs have increased by 100 to 200% since the onset of covid. Container availability will take some time to recover. The shipping routes remain vulnerable to geo-political scuffles also. In his book The Disunited Nations, strategist Peter Zeihan writes that once the US stops delivering its role as a global cop safe-guarding the ocean routes, every exporting nation will face a huge task to secure their goods. This will add to the costs astronomically. The globalisation ship can sink under its weight in such times.

Readers can ponder over whether the US will remain a super cop, whether globalisation and global slack can continue to suppress the prices. But one thing remains true that both Summers and the MMT brigade have compelling arguments. One is time tested granddaddy, one is the wonder kid and the truth as always remains somewhere in the twilight zone.